BEACONHOUSE INTERNATIONAL COLLEGE

HND BUSINESS LAW

Instructor: Taha Hafeez

 LEARNING OUTCOME

THE IMPACT OF LAW

Illustrate the Potential Impact of the Law on a Business

Contract Law: Elements & Terms

Capacity to Contract

• To form a contract, a party must have the legal capacity to do so.

• The categories of legal person (which includes natural persons) which don’t have legal capacity are:

• Bankrupts.

• Minors (subject to the Minors' Contracts Act 1987).

• Individuals operating under a mental disability (at common law).

• Companies which have not yet been formed.

• Companies which have been dissolved.

• Some individuals may not have power to legally bind a company or other incorporated legal
entity, such as a director of a company which has appointed a liquidator (it's a point related to
actual or ostensible authority).

• In business transactions, legal capacity will usually be one of the more straightforward
elements of a contract to satisfy.
Intention to create Legal Relations

• The parties must intend that the offer and acceptance is legally binding upon them: that's
known as "contractual intention".

• In commercial negotiations, it's presumed that the parties intend to create a legal relationship.

• When there is a dispute about whether a contract was formed or not, it's for the party alleging
that there was no intention to create a legal relationship to prove it: i.e. they bear the burden of
proof. And they must prove it on the balance of probabilities.
Exception to the General Rule on Intention to Create Legal
Relations

• Where one of the parties actually knows that the other party does not
actually have an intention to be bound, that party will not be permitted
to rely on the objective test to get the better of the other contracting
party.

• So the test is primarily objective, but falls back to a subject test when
there is evidence that the other person knew that their counterpart did
not have any subjective intention to make a contract.
Vitiating Factors

• Deal with when contracts can be set aside.

• In the lead up to creation of the contract, statements can be made,

misunderstandings can arise which undermine the legally binding
nature of the contract. And then one of the parties might mislead their
counterpart (knowingly or not) in respect to some fact, state of affairs
or term of the contract.
• The most common causes of action which can interfere with creation
of a business contract or permit it to be made void include:

Misrepresentation

• Taints the otherwise lawful formation of a contract.

• When a statement by one party to the other before the contract

is formed is untrue, it will be a misrepresentation.

• An actionable misrepresentation renders the contract voidable,

that is, valid until voided by the party relying on the
misrepresentation when entering into the contract.
The remedy for misrepresentation is rescission.
Law of Mistake

• The law of mistake is about correcting - one way or another - fundamental

misunderstandings which underlies a contract which has been made.

Cases of mistake include where:

• Both of the parties operate under a fundamental misapprehension of the facts

forming the background to the contract (I buy land from you. We both think that
the land is good for growing wheat. It's not suited for that purpose).

• One or both parties are mistaken about the terms of the contract (I thought the
contract included a term that payments would be made at the end of a contract. It
didn’t).

• one or both of the parties are mistaken about the identity of the other party.
In mistake cases, the contract might be:

• Declared void for mistake - the innocent party may rescind the
contract. In these cases, it's clearer to say that the contract never
existed, rather than say it's void. However, we can't say that because
the law treats the contract as formed - and legally binding - under it is
agreed to be void by the parties, or a court says it's void.

• Rectified to make it say what the parties actually agreed (and not what
was recorded in writing)
Non est Factum

• Non est Factum applies when a person signs a contract is mistaken as

to the fundamental character or effect to what they believed. The
different must be "radical" or "very substantial" when contrasted to the
actual legal effect of the document signed.

• The rule also may have effect to render a contract void when a contract
is signed when it was blank, and filled in by another person at a later
date.
Economic duress

• When unfair - and extreme - commercial pressure is applied to a party

to enter a contract or vary an existing contract in a business context, it
may be declared void.

• An indicator of economic duress is a demand for performance which is

well in excess of the rights of the person making the demands.
Illegality

• The law which applies to statutory illegality and common law

illegality may operate render a contract void or unenforceable.

• Illegal consideration can play a part in a contract falling over, because

the consideration can't be taken into account for the purposes of
forming the contract

• There is an important distinction to be made between contracts which

are void and claims for breach of contract.
• The first 4 Vitiating Factors, if successful, may mean that the law finds
that the contract is deemed to have never come into force: for legal
purposes, it never existed in the first place. It's declared void.

• Claims for breach of contract are fundamentally different.

• A claim for breach of contract requires a contract to be in existence.

• So that means that the remedies of rescission and damages for breach
of contract are inconsistent with one another: you can't have both at
the same time.
Consequences of a legally binding contract

• Forming a legally binding contract does not need to be a deliberate act. It can happen although you
had no intention of forming a contract.

• Once the fundamental elements of offer, acceptance, consideration, intention to be legally bound
and capacity exists, a series of legal consequences arise as part of the contractual relationship.

• Those rules apply, subject to agreement to the contrary.

• They include:

1. Privity of contract: only the parties to the contract can enforce its terms, subject to limited
exceptions.

2. Assignment of duties to perform the contract can't be transferred to someone else, without the
permission of the other contracting party
3. Subcontracting of services doesn't relieve the contracting party from
performing its obligations agreed.

4. Implied terms may add to the express terms agreed, to give what is
known as "business efficacy" to the contract.

5. That can have the effect of including terms in the contract which
aren't expressly agreed... which can come as a surprise to the uninitiated.

6. Non-compliance with terms and conditions will be a breach of

contract. Rights arise for breach of contract, which usually include right
to damages and power to terminate the contract if it's a really serious
breach.